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What’s it like to run a company that can raise $17M in a flash? We recently asked P2Binvestor’s Krista Morgan just that after they closed a huge round in a combination of equity and debt.

“It’s just another day,” she said. However, you might find her in a different state on a day she lands a meeting with a major potential partner. “I oddly celebrate my victories when they start instead of when they close,” she told us. We sat down with Krista to learn a little bit about her journey with one of the Rocky Mountain Ecosystem’s favorite startups.

You’ve dodged going to a traditional VC almost altogether. Round after round you’ve found a hot opportunity with Angel groups and individual investors. What inspired you to take this unique investment approach?

We were informed this path to raising capital wasn’t intentional at all. Like many female entrepreneurs, Krista tried to raise a traditional Series A round, but was repeatedly turned away. Now with 8 rounds of funding totaling over $33M, the lending platform has brought in numerous private investors, plus New Resource Bank and Amalgamated Bank as financing partners, to mobilize swaths of capital into flexible lines of credit for growing companies. So far, the return to Angel investors for debt or equity financing has proven to be the right move in Krista’s eyes. While the raises have been fairly modest, Krista has proven the capabilities of intelligent capital strategy.

In light of your own difficulties, how do you feel about the statistics that shows female founders receive almost no venture dollars, yet have proven to be a 12x better investment than all-male teams?

“Are they, though?” she retorted. “I would argue that statistic is flawed. The only women who get venture funding are the best connected, and probably the best entrepreneurs. If we only fund the best, of course the results are going to be better on average.”

Krista believes that, in funding parity and equality of opportunity, we will likely see equality of outcome. Some female founders will go on to run tomorrow’s innovative giants, but many will fail and learn important lessons. As an investor in the Women’s Investor Network, Krista is aligned with WIN in pursuing a future of more experienced female entrepreneurs who can be investors in good faith.

“I’d love to be able to raise a ton of capital and just flood the market,” she told us. “A lot of the people who moved into our space moved too fast or broke too many things.” Krista notes that, as a founder, she has a lot more reason to stick around than many other CEOs. Careful capital raising means her stake in the company’s success is still substantial. Unlike some of the second movers, P2Bi’s lights are still on and shining bright. This can be an important lesson for those looking to follow the Facebook motto “move fast and break things”.

P2Binvestor is going into its seventh year. What’s next for loans, for P2Bi, and for you, Krista?

“What’s next for P2Bi is what’s next for me,” she told us. “I’ve got to hit my goal on number of bank partners for the year while continuing to grow our client base.” One could argue Krista is as driven as ever in her pursuit to make P2Binvestor a household name in the lending space. We asked her about who she is now compared to when she started the company. “Krista in 2012 was tequila, dogs, and searching,” she said. “Krista in 2018 is tequila, dogs, and P2Bi.” Today might just be “another day” according to P2Binvestor’s CEO and co-founder, but her drive and determination is gradually moving the company towards bigger things in the future of fintech.

P2Binvestor has worked with RVC since 2014. RVC has participated in 5 of P2Bi’s raises and have been glad to watch them grow in an industry that helps mobilize capital. P2Bi helps pre-banking companies secure asset backed loans to help them reach their goals by working with banks and accredited investors. P2Bi has grown to $32.5M in valuation since their Seed round in 2014.

In a panel on angel return data at the Angel Capital Association Summit recently the speaker went back and forth between data using ROI (multiples of the original investment) and IRR (internal rate of return). These metrics are very different and it is important for angels to have a good understanding of how using each of these will impact their investment strategy – in many cases for the worse!

Why Hunting for Unicorns May not be a Good Strategy for Angel Investors

There is a mythology among angel investors about going for “unicorns” (private companies with a valuation of $1 billion or more) in their portfolios. In many cases, real returns from unicorns may be less than hitting solid singles and doubles that exit at under $100 million. Here’s why:

While unicorns may appear to give great returns, our speaker gave an example. He had invested in DocuSign which is now readying itself for an IPO. (Initial Public Offering) After multiple follow-on rounds after his angel investment, his percentage ownership had been significantly diluted, but even worse – it took twelve years for DocuSign to get to exit from the time of his investment. While he expects to receive an investment ROI multiple of 4.8 times his original investment, that comes out to only a 15.3% IRR. Getting $480,000 back on a $100,000 investment sounds good initially. When the amount of time that the investment takes comes into the calculation, the unicorn doesn’t look as good as some of the same investor’s exits that came along in five or fewer years and yielded $100 million or less. In fact, his average IRR over his portfolio was 27%, so this unicorn was bringing his average down!

Angel Investors should think about their investments from a portfolio strategy viewpoint.

Smart angels will target 10X their investment back within five years or less – that’s a 58.5% IRR. After calculating winners and losers over time, angels who invest through angel groups will typically see a portfolio return in the 23-37% range, or about 2.5X. Getting 4.8X your money back sounds good, until you think about what you could have done with that money if you could have reinvested it after five years.

What if the investor had taken his $100,000 and NOT invested in DocuSign, but rather invested in ten deals at $10,000 each with half of them returning nothing and the returns from the others averaging 2.5X return over five years? And what if he had reinvested the returns from those investments? At that rate, including winners and losers, he would have received $850,000 at the end of twelve years for an 8.5X return or 27% IRR. Clearly, taking time into account, but also taking the opportunity to recycle exits into the next deal increases profits.

The likelihood of any one investment being a unicorn is something like 1,800 to 1, but the most prolific angel investors I know have portfolios of maybe 100-150 deals. On the other hand, getting a 2.5X in five years on a ten company portfolio is fairly common among angels. Unicorn hunting, even when successful returned almost half the cash that the diversified angel did. Using IRR instead of ROI helps angels to understand the best way to think of their strategy.

How do Venture Capitalists Differ from Angels?

Venture Capital funds often talk about how they need to go for the big multiples “because they need to return large amounts to their Limited Partners.” This is partly true, but not for the reasons they would have you think. Angels have the same return targets as VCs, and, when they invest in groups, they tend to outperform Venture Capital funds by a good margin. Over the past fifteen years VCs have been hunting for unicorns and missing out on the singles,doubles and triples that angels enjoy, but their returns averaged 9.98% – less than half of what angels have earned during the same period.

VCs are limited by time in their investments. The average VC fund lasts for ten years, and many funds have a policy of not “recycling” their returns into new investments, so they are motivated to get large multiples of ROI rather than focusing on quick returns with high IRR. It’s better if a fund can recycle its returns into new investments, with the caveat that they must return all capital to Limited Partners within ten years.

VCs also shy from using IRR to measure their fund’s performance because of the “J Curve” which refers to the shorter period between investment and failure compared to the longer period between investment and large-multiple success. Using IRR can make the fund’s performance look sub-par early in the fund’s lifecycle.

Finally, the institutional investors that are the VC’s Limited Partners often earmark their funds for long investment periods and the last thing they want is to get a 30% IRR on an investment that comes back in the first year. They would rather deploy the capital for longer periods for larger returns. Because institutional investors have a high cost of analyzing investment opportunities, it’s not as easy for them to re-deploy as it might be for angels.

So, angel investors differ from VCs in investment strategy, and if they invest in groups and pay attention to using IRR as their performance metric, they can outperform VCs and create significant returns for their own portfolios.